What are blue chip stocks?
A blue chip stock is a company listed on one of the world’s major stock markets, and one of the largest in terms of market capitalisation or stock value. These are big, recognisable brand names, often with a long operational history and known for weathering economic dips and sectoral changes to deliver returns to their investors.
How to invest in blue chip stocks
Before you invest in any blue chip stocks, you should review a blue chip companies list. In the UK, the FTSE 100 index is the biggest 100 companies listed on the London Stock Exchange (LSE) in terms of market capitalisation. Examples include pharmaceutical giant GlaxoSmithKline, oil companies BP and Royal Dutch Shell, banking business HSBC, beverage company Coca Cola and mining firm Rio Tinto Group.
Over in the US, the blue chip sector attracting a lot of attention at the moment is the technology sector – stocks like Google owner Alphabet, Facebook, Netflix, Apple and Amazon (also known as the FAANG stocks).
Investing in these firms is as easy as logging into an online investment platform and buying a share, or hiring a stock broker to buy shares on your behalf. If you can’t decide which company to back, you can invest in all of them through an investment fund or an exchange traded fund (ETF) which offers exposure to a particular segment of blue chips (e.g. financial sector blue chips).
But are blue chip stocks safe?
In a word, no — but only in the sense that no stock market investment is ever truly safe and you may get back less than your initial investment. However, blue chip stocks have historically proven to be far safer than other stocks and shares, thanks to their long track record and proven ability to withstand market volatility.
Five benefits of investing in blue chip stocks
1. The brand recognition
Blue chip investments are popular for many reasons, but one of the big draws is that they tend to be recognisable brand names. This makes it easier to follow the company’s progress in the mainstream media and financial press, so you can stay informed about your investment without having to scrutinise the markets.
Some investors also get a kick out of the fact that they are ‘supporting’ their investment by, for instance, drinking Coca Cola or banking with HSBC.
2. The ease of access
Thanks to their popularity, blue chip stocks are incredibly easy to buy and sell. This benefit cannot be understated, as many retail investors can become frustrated when they are unable to offload unpopular investments when the value starts to drop, or when they just need to release a bit of equity.
Blue chip stocks are among the most liquid investments in the world, so you can trade in and out at a moment’s notice, and via any number of brokers, fund managers or online investment platforms.
3. The tax—free benefits
Every blue chip stock is eligible for inclusion within a stocks and shares ISA, which means that all of your returns are protected from taxation. Blue chips can also be held within a lifetime ISA or a self—invested personal pension (SIPP), meaning that you can keep blue chip stocks in your pension portfolio without paying any tax on the interest that you accrue.
And if you automatically reinvest your dividends and returns, you can effectively earn interest on your interest, allowing your blue chip portfolio to grow even more.
4. The diversification
Blue chip companies tend to be large corporates with an international portfolio that spans several sectors. For instance, BP is ostensibly an oil and gas company, but it also owns its own petrol stations, a string of convenience stores in the US, as well as the Wild Bean Coffee Company in the UK. This gives the firm some exposure to the retail and consumer markets, in addition to the commodities sector.
Just one blue chip investment could contain as much diversification as three different small—cap stocks, for the price of just one transaction.
5. The variety of investment options
Blue chip stocks are investment market stalwarts, and as such there are a variety of ways to access them. Of course you can simply buy the stocks directly, but you can also access these companies through investment funds or ETFs. In fact, there are numerous blue—chip themed ETFs available to investors of all stripes, whether you want to invest in the UK—based companies of the FTSE 100, the American conglomerates of the S&P 500, or the rising stars of the Korean stock exchange. The main benefit of an ETF is that the fees are minimal, and one transaction fee can potentially unlock access to hundreds of different shares, allowing you to keep your costs down and diversify your portfolio at the touch of a button.